SD401K vs SD IRA and Checkbook Control

5 Replies

I have been reading through the posts about self directed IRA/401Ks/checkbook control etc and there is so much information! I left my job a few months ago and I want to transfer the funds from my 401K to one of these types of accounts so that I can use the funds for investing in real estate. I have an LLC so one of my question is, would it be better to open a solo 401K or open a self directed IRA? Fidelity offers solo 401Ks but I came across the website for Accuplan. Does anyone have experience with Fidelity and/or Accuplan? What questions should I be asking when I contact these companies? Thank you.

@Marsha Segree

Good question. Both the solo 401k and the IRA allow for investing in alternative investments like real estate. The solo 401k, however, is only for those who are self-employed.

Following are the similarities and differences between the solo 401k and the self-directed IRA.

The Self-Directed IRA and Solo 401k Similarities

  • Both were created by congress for individuals to save for retirement;
  • Both may be invested in alternative investments such as real estate, precious metals tax liens, promissory notes, private company shares, and stocks and mutual funds, to name a few;
  • Both allow for Roth contributions;
  • Both are subject to prohibited transaction rules;
  • Both are subject to federal taxes at time of distribution;
  • Both allow for checkbook control for placing alternative investments;
  • Both may be invested in annuities;
  • Both are protected from creditors;
  • Both allow for nondeductible contributions; and
  • Both are prohibited from investing in assets listed under I.R.C. 408(m).

The Self-Directed IRA and Solo 401k Differences

  • In order to open a solo 401k, self-employment, whether on a part-time or full-time basis, is required;
  • To open a self-directed IRA, self-employment income is not required;
  • In order to gain IRA checkbook control over the self-directed IRA funds, a limited liability company (IRA LLC) (must be utilized;
  • The solo 401k allows for checkbook control from the onset;
  • The solo 401k allows for personal loan known as a solo 401k loan;
  • It is prohibited to borrow from your IRA;
  • The Solo 401k may be invested in life insurance;
  • The self-directed IRA may not be invested in life insurance;
  • The solo 401k allow for high contribution amounts (for 2016, the solo 401k contribution limit is $53,000, whereas the self-directed IRA contribution limit is $5,500);
  • The solo 401k business owner can serve as trustee of the solo 401k;
  • The self-directed IRA participant/owner may not serve as trustee or custodian of her IRA; instead, a trust company or bank institution is required;
  • When distributions commence from the solo 401k a mandatory 20% of federal taxes must be withheld from each distribution and submitted electronically to the IRS by the 15th of the month following the date of each distribution;
  • Rollovers and/or transfers from IRAs or qualified plans (e.g., former employer 401k) to a solo 401k are not reported on Form 5498, but rather on Form 5500-EZ, but only if the air market value of the solo 401k exceeds $250K as of the end of the plan year (generally 12/31);
  • When funds are rolled over or transferred from an IRA or 401k to a self-directed IRA, the amount deposited into the self-directed IRA is reported on Form 5498 by the receiving self-directed IRA custodian by May of the year following the rollover/transfer.
  • Rollovers (provided the 60 day rollover window is satisfied) from an IRA to a Solo 401k or self-directed IRA are reported on lines 15a and 15b of Form 1040;
  • Pre-tax IRA contributions on reported on line 32 of Form 1040;
  • Pre-tax solo 401k contributions are reported on line 28 of Form 1040;
  • Roth solo 401k funds are subject to RMDs;
  • A Roth 401k may be transferred to a Roth IRA (Note that from a planning perspective, it may be advantageous to transfer Roth Solo 401k funds to a Roth IRA before turning age 70 ½ in order to escape the Roth RMD requirement applicable to Roth 401k contributions including Roth Solo 401k contributions and earnings.);
  • Roth IRA funds are not subject to requirement minimum distributions (RMDs);
  • The fair market value (FMV) of assets held in a self-directed IRA is reported on form 5498;
  • The fair market value of assets held in a solo 401k are reported on Form 5500-EZ;
  • At termination, the solo 401k is required to file a final Form 5500-EZ and 1099-R; and
  • At termination, the self-directed IRA is only required to file a form 1099-R.

@Marsha Segree

Below are 3 things to consider when selecting a custodian/administrator for a self-directed IRA or Solo 401(k).

1. Knowledge (They actually know what they are talking about)

2. Customer service (can you reach a person, how quickly?)

3. Ease of transactions

If you have any questions or would like to connect, please feel free to send me a message.



@Marsha Segree

The first question is whether your LLC qualifies to sponsor a Solo 401(k). If it is for passive asset holdings such as rentals, it would not be. If you are using the LLC to provide a product or service and generate earned income, then that LLC could sponsor a Solo 401(K) plan.

Generally speaking, if you qualify for a Solo 401k - both today and for the long term, there are some advantages to the Solo 401(k) format in terms of higher contribution limits, elimination of UDFI taxation on leveraged real estate investment and a few other factors. That said, a Checkbook IRA LLC is a great tool, and you should speak with someone knowledgeable about these plans to help you determine which will be the better fit for your situation and goals.

Fidelity and all of the mainstream brokerages offer Solo 401(k) plans, but those plans will be limited to stock market investing and not self-directed with the capacity to invest in real estate.

There are several providers such as Accuplan that offer truly self-directed Solo 401(k) plans.  Speak to a few as the pricing and quality of service vary greatly in this industry.

@Marsha Segree

If you want to invest in more than stocks, mutual funds, and the like, a plan from a brokerage like Fidelity is not going to work for you. There are a handful of Solo 401k providers who contribute here on BP. If you contact a few, you'll probably start to get a pretty good idea of what will work for you and the kinds of questions you'll want to ask.

This is amazing!  Thank you all for your very helpful responses.  

Very thorough information @Mark Nolan . Thank you.

@Brian Eastman - I will be holding properties for rentals and rehabbing/selling properties with my LLC and thank you for your very helpful response

Thank you @Justin Windham .  I will definitely contact a few providers for more information.

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